Real estate makes a great investment option -- but too much real estate can become a millstone around your portfolio's neck. If 80 percent of your investments are in real estate and the market slumps, that's gong to hurt you more than if your holdings were only 30 percent. Rebalancing and diversifying your portfolio protects you against losses stemming from any single asset class.
If you concentrate your real-estate investments in a single market, you need to rebalance even if you want to keep the same percentage of your money in real estate. The Miami condo market, for example, has seen epic gains at times, but from 2007 through 2011, speculation and overbuilding led to a massive collapse. Owning real estate in different parts of the country, overseas or different types of real estate -- some for rental, some for eventual sale -- is safer than placing all your investment chips on a single number.
One drawback to investing in land and buildings is that they're illiquid -- if you need cash fast, you can't count on turning real estate into greenbacks overnight. Investing in money market accounts or mutual funds is one option: Money-market investments are set up to be very liquid, so if you need money fast, you can dip into them for cash. That reduces the risk of having to sell real estate at a loss just to put money in the bank.
Risk and Return
If you invest in a good rental property generating a steady monthly income it's not as likely to skyrocket in value as a good stock pick. Even in a good market, however, stocks are more speculative: There's more chance of a loss, but more possibility for a spectacular gain. If you're investing for the long term, and you can afford to ride out any stock market slumps, rebalancing with good stock picks helps your portfolio grow.
Rebalancing protects you because even in a massive real estate slump, the stock market or your mutual funds may remain healthy. Diversifying isn't a trick to help you beat the market, however: Switching in and out of different investments -- selling off real estate to catch the stock market, switching out of stocks to bonds, then back to real estate -- is a losing strategy: The chance of making every switch at just the right time is pretty slim.
- China Knowledge at Wharton: A Better Defense for Real Estate Portfolios
- JasonHartman.com: Cyclical Bottom May be in Sight for Miami Real Estate Investors
- Bankrate: Money Markets: A Liquid Investment
- Seeking Alpha: Real Estate Investing vs. Stock Market Speculation
- Nolo: How to Diversify Your Investments -- an Easy Rule of Thumb
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.